Pricing in the loan market is tightening and risk levels are getting stretched as the new issue market plods along and investors scurry to put their money to work. The bond market has been siphoning off bank money for the past few months, but market players say the problem is exacerbated by a steady flow of buyside money coming into the market and looking for a home. Broad demand from large funds such as the $2.02 billion Eaton Vance Limited Duration Income Fund and smaller funds is also crowding the market.
Most deals are being gobbled up as soon as they are launched for syndication and then reverse price flexed soon after, dropping 25-50 basis points on average. Deals such as those for United Components, CBD Media, Cross Country Healthcare, Werner Ladder and Pacer International have all been flexed down after receiving red hot reception. Graphic Packaging Corp. and Domino's continued the trend late last week, also moving toward tighter pricing. And some credits continue to push leverage (LMW, 5/19) with deals like middle-market nutrition bar maker Nellson Nutraceutical's credit backing its acquisition of Bariatrix. An investor noted that Nellson was pushing multiples high at 3.5 times. Dividend recapitalizations due to the non-existent IPO market have furthermore been on the rise, a banker noted.
The deals are being scarfed up by big funds, such as Eaton Vance's, and collateralized loan obligations from such firms as The Carlyle Group, GoldenTree Asset Management and New York Life Investment Management (LMW, 6/9, 6/2). "They're committing to everything, . . .that's a lot of product," the dealer said of Eaton Vance and similar funds. Bill Gillen, senior v.p. and national sales director at Eaton Vance, confirmed that the fund is still in the process of investing, with a minimum of 25% to 33% targeted in the senior secured loan asset class. He declined to comment further on the fund.
The market could use a healthy dose of mergers and acquisition financing, bankers agreed. "New supply in the form of M&A would take some steam out of the market," said Thomas Newberry, managing director in the syndicated loan group at Credit Suisse First Boston. He explained that the absence of such deals, excluding the smaller middle-market leveraged buyout deals, leaves buysiders scrambling to invest.
The hungry debt market ties closely to the ripple effects of a hot high-yield market, Newberry added. There have been many repayments of quality bank debt as the issuers see the opportunity to take out their credits with a better bond deal, another banker explained. "So these quality names are paying down quality debt [and] accounts are starved for good paper and for good credits," she said. "Bank loans are pre-payable, so if market conditions are good in the high-yield market, 'boom' they pay it down," the investor added. The dealer added that credits are still a function of credit quality despite the present frenzy-like tone. The weaker credits still demand juice, he said.
